Wall Street Journal: Will El Salvador Veer Left?

Wishes for peace on Earth are on the lips of the faithful throughout Latin America this week. But in El Salvador, these hopeful sentiments mask trepidation about what 2009 will bring. (Photo AFP)

The fears stem from the fact that the former guerrilla group Farabundo Marti Front for National Liberation -- aka the FMLN -- is now leading in the opinion polls for the March 15 presidential elections. FMLN candidate Mauricio Funes is widely considered a moderate leftist. But other party honchos -- including vice-presidential candidate Salvador Sánchez Cerén -- are of the more traditional (i.e., militant) FMLN variety. Many Salvadorans are worried that if the party comes to power, its radicalized elements will overwhelm the likes of Mr. Funes and pull the country hard to the left.

This would be tragic for the tiny, market-oriented Central American nation, which suffered so much in the 1980s at the hands of the Soviet-backed FMLN. Yet if the FMLN wins the election, don't blame Hugo Chávez, Fidel Castro or neighboring Nicaraguan President Daniel Ortega, who still fly the revolution's tattered banner.



Instead, look to Salvadoran President Elias Antonio Saca of the center-right Arena Party. Mr. Saca was in Washington last week promising President Bush Salvadoran help in fighting the U.S. "war on drugs" and trying to pass himself off as a champion of traditional American economic values. But back home in El Salvador, his actions have earned him a reputation for undermining democratic capitalism through the abrogation of contracts.

Take the case of Pacific Rim Mining Corp. As I reported in this column four months ago, the company says that from 2002-2006 it invested $77 million in an old gold mine near the Honduran border with the encouragement of the Salvadoran government. By 2006, Pacific Rim says it had exceeded all environmental requirements at the El Dorado mine and fully expected to get the permit needed to begin

Two years later the company still doesn't have a permit, nor does it have any word from the government that it has not complied with the law. CEO Thomas Shrake says the government's "inaction" has put his company in desperate straits. So desperate that two weeks ago it filed a "notice of intent" to seek arbitration under the Central American Free Trade Agreement (Cafta) for "breaches of international and El Salvadoran law." If there is no resolution by March 9, Pacific Rim says it will proceed to arbitration and ask for monetary damages in the hundreds of millions of dollars.

That's a high price for a poor country. More expensive, however, is the lost opportunity for Salvadorans. Mr. Shrake, who is a geologist, says that El Salvador sits in the center of the Central American Gold Belt and that gold, as an engine of growth, has the potential to transform the country's economy in the same way that copper changed Chile. But Mr. Saca's government, he says, has "effectively shut down the mining industry."

Why the government has refused to act on the Pacific Rim project remains unclear, and my many efforts to get an explanation from the government have gone unanswered. Certainly Mr. Saca can't blame it on politics. Though some nongovernmental organizations have tried to block the mine, polls show that a majority of Salvadorans and politicians across party lines support mining, providing there are environmental precautions. Mr. Shrake says the government has not given him a reason for the permit denial.

Meanwhile, another mystery has gained attention in Salvador: From late September to early November, especially high volumes of Pacific Rim stock traded on the American and Toronto stock exchanges. This means that a large quantity of stock was being acquired and at a very good price; after the company's announcement in August that it had to suspend operations at El Dorado, the share value dropped 90%. This seems like a risky trade but should the permit come through the stock is likely to recover, making buyers at distressed prices very rich.

Pacific Rim is not the only company claiming its rights are being violated by Mr. Saca's administration. In November, the Italian power company Enel filed a suit against the government alleging it broke a contract that would have allowed Enel to increase its ownership in the state energy company LaGEO.

Allegations that the Saca government is violating its own laws have damaged the country's image at a time when foreign investors already are skittish due to election-year uncertainty and global economic weakness. Pacific Rim used to have 262 direct employees in Salvador. It expected the mine would create 500 direct jobs in all and another 2,500 indirectly. Instead, the company's El Salvador staff is now down to 36.

This is precisely why voters are likely to take a chance on the FMLN come election day. If they do, Mr. Funes will have Mr. Saca to thank.

Source The Wall Street Journal - writer to O'Grady@wsj.com 22/Dic /2008

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